China Financials 9 November 2015

KWG Property (1813 HK) KWG Proper ty

Target price: HKD7.41 Share price (6 Nov): HKD5.83 | Up/downside: +27.1%

Initiation: Sitting pretty in the city Cynthia Chan (852) 2773 8243  Has built up quality landbank in upper-tier cities before many others [email protected]  Prudent expansion but higher margins and dividend yield versus peers Jonas Kan, CFA (852) 2848 4439  Initiating with a Buy (1) rating and target price of HKD7.41 [email protected]

Investment case: We see KWG Property (KWG) as a quality niche player Share price performance in China property which is awaiting further recognition. (HKD) (%) 8.5 125 We think KWG has pursued a strategy different from that of many 7.4 114 mainstream players. It has not pursued aggressive landbanking, nor did it 6.3 103 5.1 91 follow the crowd and go into tier-3 cities in 2011-12. Instead, it has focused 4.0 80 on its key home market, Guangzhou, and selected upper-tier cities where it Nov-14 Feb-15 May-15 Aug-15 Nov-15 has gradually and steadily built up landbank and presence. Compared with KWG Proper (LHS) Relative to HSI (RHS) most other players, it has paid a lot more attention to quality than quantity, maintaining margins rather than expanding its business scale and contract 12-month range 4.36-8.39 sales. Market cap (USDbn) 2.21 3m avg daily turnover (USDm) 5.41 We believe this strategy has worked for KWG and resulted in favourable Shares outstanding (m) 2,947 Major shareholder Kong Jian Min (60.8%) rewards: a quality landbank in a number of China’s upper-tier cities acquired at a reasonable cost, higher-than-sector average gross margins, a Financial summary (CNY) high dividend yield, manageable gearing, and a track record for having Year to 31 Dec 15E 16E 17E some of the highest-quality products in the industry. Revenue (m) 12,029 14,104 16,168 Operating profit (m) 2,724 3,215 3,626 Net profit (m) 3,006 3,566 4,117 Such qualities have enabled KWG to attract various major players in the Core EPS (fully-diluted) 1.020 1.210 1.396 industry to set up joint-venture projects with it. Most importantly, these JV EPS change (%) 15.4 18.6 15.4 projects have allowed KWG to leverage on the experience and resources Daiwa vs Cons. EPS (%) (1.5) (1.4) 4.6 PER (x) 4.7 3.9 3.4 of its partners and provided it with an additional avenue for growth – we Dividend yield (%) 7.2 7.9 8.8 forecast its net profit to rise by 15-19% for 2015-17E. DPS 0.342 0.375 0.419 PBR (x) 0.6 0.5 0.4 We forecast contract sales of CNY18.8bn for KWG this year (-8.3% YoY), EV/EBITDA (x) 3.3 2.3 1.6 ROE (%) 13.7 14.1 14.1 which will fall short of its CNY22.5bn sales target as a result of delayed Source: FactSet, Daiwa forecasts project launches. With the company having sufficient quality projects on hand and expecting to launch more projects in tier-1 cities in 2016, we forecast its contract sales to recover to 18% YoY growth for 2016.

Catalysts: The potential share-price catalysts we see are: 1) increased market interest in quality names outside the popular ones, 2) KWG’s en bloc sale of an office project in Shanghai in 1H16, which could secure around CNY2-3bn in sales, and 3) growing recognition that KWG’s dividend yield is high and sustainable.

Valuation: Our target price of HKD7.41 is based on a 50% target discount applied to our estimated end-2016E NAV of HKD14.82. This would translate into 2015 and 2016 PERs of 6.0x and 5.0x, respectively.

Risks: The key risks to our call include: 1) a deterioration in China’s economy, and 2) rising land prices in tier-1 and major tier-2 cities which could make it difficult for KWG to replenish its landbank.

See important disclosures, including any required research certifications, beginning on page 34

KWG Property (1813 HK): 9 November 2015

Table of contents

What differentiates KWG? ...... 6 Consistent strategy with focus on upper-tier cities ...... 6 In the right cities...... 7 Attractive dividend yield ...... 10 JV projects, a supplementary growth driver ...... 12 Contract sales and rental income to see decent growth...... 14 On the right track to develop its commercial properties ...... 17 Solid earnings growth & stable financial position ...... 19 Earnings outlook ...... 19 Financial position ...... 20 Valuation ...... 22 Initiate with Buy (1) rating and target price of HKD7.41 ...... 22 Risks ...... 25 Appendix I: company background ...... 26 Mid- to high-end property developer ...... 26 Appendix II: major development properties ...... 30

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KWG Property (1813 HK): 9 November 2015

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook KWG: contract sales

As a result of a delay in KWG’s project launches in (CNYm) Guangzhou, Shanghai and Beijing, we forecast KWG’s 30,000 CAGR - 12.7% contract sales to come in at CNY18.8bn for 2015, which is 25,480 22,100 down 8.3% YoY and falls short of its CNY22.5bn sales 20,500 18,800 20,000 target. However, we see this as mainly a timing issue and 16,300 do not think this suggests that its products are not in 12,200 demand – its attributable unbooked contract sales as at 11,000 11,500 end-June 2015 amounted to CNY23bn. Also, we look for its 10,000 contract sales to recover in 2016 to 17.6% YoY growth on the back of sufficient quality projects on hand and more 0 projects in tier-1 cities likely to be launched. For 2017, we 2010 2011 2012 2013 2014 2015E 2016E 2017E forecast the company to deliver 15.3% YoY growth in Source: Company, Daiwa contract sales to reach CNY25.5bn.

Valuation KWG: discount to NAV

KWG stock is trading currently at a 61% discount to its (%) NAV, well below its 2010-15 mean discount of 51% and just 0 slightly above its historical mean discount -1SD of 63%. Meanwhile, its mid-cap peers are trading at discounts of (20) 50-70% to the market NAV. We think KWG’s valuation +1SD -38.9% deserves a premium to its peers given what we see as its (40) right strategies and products, which lead to its reasonable Mean -51.0% land costs and higher-than-peer margins. (60) -1SD -63.1%

(80) 2010 2011 2012 2013 2014 2015

Source: Bloomberg, Daiwa

KWG Property: revisions to the Bloomberg-consensus EPS Earnings revisions forecasts

Our earnings forecasts for 2015-16 are largely in line with (CNY) those of the Bloomberg consensus. Our 2017 earnings 1.6 forecast is 4% above the market consensus, as we factor 1.5 in higher growth in its share of profit from its JV and 1.4 associate projects. 1.3 1.2 1.1 1.0 0.9 0.8 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 2015E consensus EPS 2016E consensus EPS

Source: Bloomberg, Daiwa

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KWG Property (1813 HK): 9 November 2015

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Recognized GFA ('000 sqm) 784 918 796 937 845 987 1,021 1,108 Recognized ASP (CNY/sqm) 9,209 10,695 12,576 11,153 11,958 11,345 12,822 13,423 Rental income from office/retail (CNY 124 139 143 145 147 169 262 414 m) Hotel operation income (CNY m) 57 70 84 203 332 406 474 559

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sale of properties 7,221 9,815 9,330 8,977 9,770 11,203 13,086 14,876 Gross rental income 124 139 143 145 147 169 262 414 Other Revenue 121 169 203 346 548 656 756 878 Total Revenue 7,466 10,123 9,676 9,468 10,466 12,029 14,104 16,168 Other income 45 48 26 32 50 55 62 69 COGS (4,368) (5,650) (6,141) (6,036) (6,748) (7,731) (9,197) (10,640) SG&A (657) (764) (894) (1,014) (1,093) (1,275) (1,467) (1,649) Other op.expenses (5) (6) (1) (1) (313) (354) (288) (322) Operating profit 2,481 3,750 2,667 2,449 2,362 2,724 3,215 3,626 Net-interest inc./(exp.) 14 (79) (23) (171) 42 33 38 43 Assoc/forex/extraord./others 13 309 1,122 1,426 2,241 1,797 2,157 2,737 Pre-tax profit 2,508 3,980 3,766 3,704 4,646 4,555 5,409 6,406 Tax (1,226) (1,876) (1,333) (955) (1,377) (1,531) (1,757) (2,184) Min. int./pref. div./others 0 (1) (27) 1 4 (18) (85) (106) Net profit (reported) 1,282 2,103 2,406 2,750 3,272 3,006 3,566 4,117 Net profit (adjusted) 1,243 1,860 1,951 2,343 2,577 3,006 3,566 4,117 EPS (reported)(CNY) 0.443 0.727 0.832 0.950 1.122 1.020 1.210 1.397 EPS (adjusted)(CNY) 0.430 0.643 0.674 0.810 0.884 1.020 1.210 1.397 EPS (adjusted fully-diluted)(CNY) 0.430 0.643 0.674 0.810 0.884 1.020 1.210 1.396 DPS (CNY) 0.110 0.220 0.150 0.290 0.330 0.342 0.375 0.419 EBIT 16,293 19,884 22,914 2,449 2,362 2,724 3,215 3,626 EBITDA 16,342 19,942 22,984 2,449 2,362 2,724 3,215 3,626

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 2,508 3,980 3,766 3,704 4,646 4,555 5,409 6,406 Depreciation and amortisation 33 36 76 69 150 171 192 212 Tax paid (623) (1,021) (1,149) (549) (1,168) (1,531) (1,757) (2,184) Change in working capital 3,031 (997) 955 4,655 507 2,165 1,829 1,681 Other operational CF items (631) (1,532) (2,638) (3,823) (4,512) (3,778) (4,308) (5,037) Cash flow from operations 4,318 466 1,011 4,056 (376) 1,582 1,364 1,079 Capex (688) (531) (1,017) (575) (554) (742) (781) (691) Net (acquisitions)/disposals (4,408) (1,127) (886) (3,741) (1,878) (1,908) (1,999) (2,014) Other investing CF items 1 1 (213) (360) 8 (298) (239) (173) Cash flow from investing (5,095) (1,657) (2,116) (4,675) (2,424) (2,948) (3,019) (2,877) Change in debt 3,679 1,384 3,274 5,558 7,164 2,942 3,047 2,638 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (145) (318) (636) (434) (644) (1,007) (1,106) (1,235) Other financing CF items (20) (1,098) (630) 2 (3,043) 91 99 108 Cash flow from financing 3,514 (32) 2,007 5,126 3,477 2,026 2,041 1,512 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 2,737 (1,223) 902 4,507 677 659 387 (286) Free cash flow 3,630 (65) (6) 3,481 (930) 840 583 388 Source: FactSet, Daiwa forecasts

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KWG Property (1813 HK): 9 November 2015

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 6,804 5,373 6,444 10,859 10,871 11,530 11,917 11,631 Inventory 16,284 20,956 21,938 22,960 28,385 32,179 35,999 40,693 Accounts receivable 1,727 1,635 1,181 2,476 2,087 2,056 2,018 2,047 Other current assets 106 158 135 156 168 168 168 168 Total current assets 24,920 28,123 29,699 36,451 41,512 45,933 50,102 54,538 Fixed assets 1,344 1,779 2,688 3,176 3,584 4,015 4,496 4,856 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 13,770 14,684 16,478 21,963 26,451 30,691 35,298 40,456 Total assets 40,034 44,586 48,864 61,590 71,547 80,639 89,897 99,850 Short-term debt 2,282 3,410 3,100 3,065 3,465 2,745 2,898 2,916 Accounts payable 10,416 10,619 9,966 11,786 9,948 10,446 10,654 10,868 Other current liabilities 2,734 4,962 5,828 10,137 14,634 17,138 19,290 21,932 Total current liabilities 15,432 18,991 18,895 24,987 28,048 30,329 32,842 35,715 Long-term debt 10,050 10,425 13,090 17,840 21,048 24,709 27,604 30,224 Other non-current liabilities 2,958 1,478 1,526 921 2,015 2,106 2,206 2,314 Total liabilities 28,440 30,893 33,511 43,748 51,111 57,144 62,652 68,254 Share capital 280 280 280 280 285 285 285 285 Reserves/R.E./others 11,304 13,210 15,001 17,537 20,131 23,172 26,837 31,083 Shareholders' equity 11,584 13,491 15,282 17,818 20,416 23,456 27,121 31,367 Minority interests 10 202 72 25 21 38 124 229 Total equity & liabilities 40,034 44,586 48,864 61,590 71,547 80,639 89,897 99,850 EV 10,779 14,235 14,949 10,177 10,353 8,943 7,527 5,801 Net debt/(cash) 5,528 8,461 9,746 10,047 13,642 15,924 18,585 21,510 BVPS (CNY) 4.004 4.663 5.282 6.159 7.002 7.960 9.204 10.645

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 75.0 35.6 25.8 (2.2) 10.5 14.9 17.3 14.6 EBITDA (YoY) 116.5 51.2 (28.9) (8.2) (3.6) 15.3 18.0 12.8 Operating profit (YoY) 116.5 51.2 (28.9) (8.2) (3.6) 15.3 18.0 12.8 Net profit (YoY) 81.6 49.6 21.4 20.1 10.0 16.6 18.6 15.4 Core EPS (fully-diluted) (YoY) 81.6 49.6 21.4 20.1 9.1 15.4 18.6 15.4 Gross-profit margin 41.5 44.2 36.5 36.2 35.5 35.7 34.8 34.2 EBITDA margin 33.2 37.1 35.6 25.9 22.6 22.6 22.8 22.4 Operating-profit margin 33.2 37.1 35.5 25.9 22.6 22.6 22.8 22.4 Net profit margin 16.6 18.4 20.2 24.7 24.6 25.0 25.3 25.5 ROAE 11.3 14.8 19.8 14.2 13.5 13.7 14.1 14.1 ROAA 3.6 4.4 7.8 4.2 3.9 4.0 4.2 4.3 ROCE 11.5 14.6 17.6 7.0 5.6 5.7 5.9 5.9 ROIC 7.8 10.1 14.6 6.9 5.4 4.9 5.1 4.8 Net debt to equity 47.7 62.7 63.8 56.4 66.8 67.8 68.2 68.1 Effective tax rate 48.9 47.1 35.4 25.8 29.7 33.6 32.5 34.1 Accounts receivable (days) 56.9 60.6 15.5 70.5 79.6 62.9 52.7 45.9 Current ratio (x) 1.6 1.5 2.2 1.5 1.5 1.5 1.5 1.5 Net interest cover (x) 4.0 5.2 4.3 2.1 2.0 2.3 2.5 2.8 Net dividend payout 24.8 30.3 18.0 30.5 29.4 33.5 31.0 30.0 Free cash flow yield 26.2 n.a. n.a. 25.2 n.a. 6.1 4.2 2.8 Source: FactSet, Daiwa forecasts

Company profile

KWG Property is based in Guangzhou and mainly focuses on the development of mid to high-end residential properties, serviced apartments, hotels, offices and retail space. The company has a total attributable landbank of 10.6m sq m in 12 cities, with Guangzhou, Foshan, Nanning and Chengdu accounting for 36%, 13%, 11% and 9% of its landbank, respectively.

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KWG Property (1813 HK): 9 November 2015

What differentiates KWG? Consistent strategy with focus on upper-tier cities 10.6m sq m landbank in 12 cities KWG started its property business in Guangzhou in 1995. It entered into Suzhou, Chengdu and Hainan in 2007, Beijing in 2008, Shanghai and Tianjin in 2010, Nanning and Hangzhou in 2013, Zhengzhou in 2014 and finally, Nanjing in 2015. As at end-August 2015, it had an attributable landbank of 10.63m sq m in 12 cities: Guangzhou (3.84m sq m), Foshan (1.40m sq m), Nanning (1.12m sq m), Chengdu (0.91m sq m), Tianjin (0.74m sq m), Hainan (0.68m sq m), Beijing, (0.59m sq m), Shanghai (0.57m sq m), Suzhou (0.45m sq m), Hangzhou (0.23m sq m), Nanjing (0.07m sq m) and Zhengzhou (0.03m sq m).

KWG: landbank breakdown by city

Landbank in upper-tier 100% cities accounts for 80% of KWG’s total landbank 80%

60%

40%

20%

0% 2010 2011 2012 2013 2014 End-Aug 2015 Guangzhou Chengdu Suzhou Tianjin Foshan Shanghai Hainan Beijing Nanning Hangzhou Zhengzhou Nanjing

Source: Company, Daiwa

KWG: landbank breakdown by city as at end-August 2015 Zhengzhou Hangzhou 0.3% Nanjing 2% 1% Nanning 11% Beijing 6% Guangzhou Hainan 36% 6% Shanghai 5%

Foshan Chengdu 13% 9% Tianjin Suzhou 7% 4% Source: Company, Daiwa

Adhered to development strategy of upper-tier city expansion KWG focused on property development in Guangzhou, its home base, for 12 years before venturing out to other cities in 2007. In the subsequent 8 years, it stepped up its expansion plans and entered into 11 cities/regions, most of which were upper-tier cities (besides Foshan and Hainan). Throughout these years, the company adhered to its development strategy of expanding in upper-tier cities. Even in 2011-12 when home purchase restrictions (HPR) were in place in upper-tier cities and many developers aggressively expanded into lower-tier cities, KWG was able to maintain its strategy of focusing on upper-tier cities.

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KWG Property (1813 HK): 9 November 2015

KWG: contract sales breakdown by city 100%

80%

60%

40%

20%

0% 2010 2011 2012 2013 2014 1H15 Guangzhou Shanghai Suzhou Beijing & Tianjin Hainan Chengdu Nanning Hangzhou Nanjing

Source: Company, Daiwa

In the right cities Prudent landbank expansion and very selective in choosing cities Many of the cities Unlike some other developers, KWG has not always expanded its landbank at a rapid KWG has penetrated pace. In 2007-10, its attributable landbank increased rapidly, from 4.9m sq m in 2007 to have strong economic 8.4m sq m in 2010. However, in the past 5 years since 2010, its landbank expansion has growth, buoyant slowed considerably, with its attributable landbank only increasing by 2.2m sq m from 8.4m home sales and sq m in 2010 to 10.6m sq m as at end-August 2015. prices, and favourable inventory situations Amid KWG’s slow landbank expansion since 2010, it has been very selective in terms of the cities in which it has established a presence. Instead of becoming a national player, it aims to achieve decent sales and high profitability, and expand its market share in the few cities it has entered into which it sees as having good potential. So far, many of the cities KWG has penetrated have strong economic growth, buoyant home sales and prices, and favourable inventory situations.

Fast economic growth in selected cities In terms of economic growth, all of KWG’s cities besides Beijing, Suzhou and Shanghai posted GDP CAGRs that were above or similar to the nationwide CAGR of 11.7% from 2010-14. This indicates that the economies of many of KWG’s cities have been growing more quickly than the average pace.

Considerable growth in home sales and prices Given that KWG’s property business is focused on tier-1 and major tier-2 cities, the local property markets in the cities to which it has exposure have generally been sturdy over the past few years, with home sales and ASPs having recorded considerable growth. Shanghai, Guangzhou, Nanjing, Suzhou, Chengdu and Nanning all saw >10% residential property sales CAGRs in 2010-14, while all the cities, with the exception of Hangzhou, recorded 23-82% growth in home prices in August 2015 compared to that in 2010.

Residential sales in cities to which KWG has exposure (CNYm) 400,000

300,000

200,000

100,000

0 2010 2011 2012 2013 2014 9M15 Guangzhou Suzhou Chengdu Beijing Shanghai Tianjin Hangzhou Nanning

Source: CREIS, Daiwa

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KWG Property (1813 HK): 9 November 2015

Residential ASPs in cities to which KWG has exposure (CNY/sqm) 25,000

20,000

15,000

10,000

5,000

0 2010 2011 2012 2013 2014 9M15

Guangzhou Suzhou Chengdu Beijing Shanghai Tianjin Hangzhou Nanning

Source: CREIS, Daiwa

Healthy inventory turnover The demand-supply dynamics in KWG’s cities look healthy in general, thanks to its focus on upper-tier cities and its careful selection of the cities it chooses to enter into. After an improvement in home sales and more effort on the part of the company to clear inventory this year, both absolute inventory and inventory turnover have come down in many of KWG’s focus cities. As at end-September 2015, other than Tianjin which has higher inventory turnover of 16 months, Beijing, Shanghai, Guangzhou, Chengdu, Hangzhou, Nanjing and Suzhou all saw low inventory turnover of 7-11 months, compared to the tier-1 and tier-2 cities’ average inventory turnover of 9 and 13 months, respectively.

Inventory turnover in cities KWG has entered into (No. of months) 40

30

20

10

0

Jul-13 Jul-14 Jul-15

Apr-13 Oct-13 Apr-14 Oct-14 Apr-15

Jan-13 Jan-14 Jan-15 Guangzhou Suzhou Chengdu Beijing Shanghai Tianjin Hangzhou Nanjing

Source: CREIS, Daiwa

Will continue to focus on existing cities KWG will continue to Going forward, KWG said it will continue to focus on property development in its existing focus on existing cities/regions, except for Hainan, where sales have been slow. It plans also to explore cities and might development opportunities in capital cities of different provinces. Certain criteria for explore business choosing new cities to enter into include population, GDP growth, disposable income per opportunities in capita, the competitiveness of KWG’s products and potential profit margins in the city, etc. provincial capitals Consistent development strategy has paid off Reasonable land costs for quality landbank in upper-tier cities KWG’s perseverance in its focus on upper-tier cities has paid off well, in our view. Property markets in many lower-tier cities started deteriorating in 2012 as a result of housing oversupply and a drying-up of housing demand. Subsequently, many developers that had aggressively expanded in lower-tier cities have returned to upper-tier cities since 2014 due to better demand-supply dynamics in those cities. The return of the developers to upper- tier cities has pushed up land prices as a result of more competition over limited supply of land. Hence, expensive landbank in upper-tier cities and consequently, lower margins, is a potential problem that many of these developers could have to face.

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KWG Property (1813 HK): 9 November 2015

Meanwhile, KWG has always focused on China’s upper-tier cities and a large proportion of its landbank (4.3m sq m attributable GFA) was acquired at reasonable costs in 2011-13 when many other developers were venturing into lower-tier cities. As a result, we believe the company will be able to maintain a low land cost-to-ASP ratio for its recognised projects in the years to follow, unlike the developers that refocused on upper-tier cities and had to acquire expensive landbank in these cities. We forecast land cost-to-ASP ratios of 21.4%, 21.8% and 23.2% for KWG’s recognised projects in 2015, 2016 and 2017, respectively, higher than its 18.8% average land cost-to-ASP ratio in 2010-14, but still at a low level.

KWG: land cost of recognised projects as % of recognised ASP

We expect its land cost- (CNY/sqm) to-ASP ratio in 2015-17E 3,000 25% to stay in a reasonable 2,500 20% range of 21-23% 2,000 15% 1,500 10% 1,000

500 5%

0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Land cost Land cost as % of recognized ASP (RHS)

Source: Company, Daiwa forecasts

Low land costs and high ASPs for projects in tier-1 cities As a lot of KWG’s quality projects were acquired before many other developers started rushing back into the upper-tier cities in 2014, the land costs for these projects are quite low, leading to higher-than-average margins. We have listed out below some of the company’s projects in China’s tier-1 cities whose sites were acquired at reasonable costs and have fetched high ASPs.

KWG: land cost and current ASP of selected projects in the tier-1 cities Name of project City Stake Year of acquisition Land cost Current ASP (CNY/sq m) (CNY/sq m) The Summit Guangzhou 100% 2009 1,015 8,000 Top of World Guangzhou 100% 2012 789 7,700 The Eden Guangzhou 50% 2013 5,457 27,500 The Horizon Guangzhou 35% 2014 3,930 11,000 Amazing Bay Shanghai 50% 2011 5,394 54,000 Vision of the World Shanghai 100% 2012 3,754 17,000 Fragrant Seasons Beijing 100% 2008 3,960 18,000 La Villa Beijing 50% 2013 5,450 24,000 Beijing Apex Beijing 50% 2013 7,619 25,000 Summer Terrace Beijing 100% 2013 20,000 66,000 Rose and Ginkgo Mansion Beijing 33% 2014 7,801 33,000

Source: Company, Daiwa

Higher-than-peer gross margins With KWG’s healthy land-cost-to-ASP ratio and its consistent focus on upper-tier cities where demand-supply dynamics are generally healthier than in lower-tier cities, it has been able to enjoy higher margins than many of its peers. In 2014, KWG recorded a gross margin of 35.5%, the highest among the China residential developers we track and well above the 27.2% average for these developers. Meanwhile, many of the developers that aggressively expanded in China’s lower-tier cities in 2011-12 have been recording thin margins for projects in those cities as a result of slow sales and limited ASP upside. These developers are likely to see even lower margins in the next few years due to their huge inventory in those lower-tier cities and the generally higher land costs in upper-tier cities if they do decide to refocus on upper-tier cities.

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KWG Property (1813 HK): 9 November 2015

China developers: 2014 gross margins 50% KWG’s gross margin of Average 35.5% in 2014 was well 40% above its peers’ average 30% of 27.2% 20%

10%

0%

COLI

COGO

CR LandCR

Estate

ChinaVanke SunacChina

PolyProperty

CIFI Holdings

Agile Property

KWG KWG Property

Country Garden

Yuexiu Property

Guangzhou R&F

EvergrandeReal

ShimaoProperty

GreentownChina Sino-OceanLand LongforProperties

BeijingCapital Land Source: Companies, Daiwa

Gross margins likely to stay at a high level despite the downtrend Despite a downtrend in KWG’s gross margin starting in 2011, which is a common trend in the industry, the company has been able to maintain a gross margin of above 35% over the past few years, which is higher than the sector average gross margin of <30%. In 2015, we forecast KWG to record a gross margin of 35.7%, lower than its 36.5% gross margin in 1H15, but slightly above the 35.5% it recorded for 2014. From 2016-17, while we believe a further decline in overall gross margins in the China property sector is inevitable, we think KWG will be no exception and will also see lower margins over the next 2 years. Nevertheless, we believe our gross margin forecasts of 34.8% and 34.2% for 2016 and 2017, respectively, for KWG would still be well above its peers’ averages.

KWG: gross margin trend

50% 44.2%

40% 41.5% 36.2% 35.7% 34.2% 36.5% 35.5% 34.8% 30%

20%

10%

0% 2010 2011 2012 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa

Attractive dividend yield High dividend payout can be maintained >7% dividend yield Thanks to its prudent landbank expansion and good cash flow management over the past expected in 2015-17E few years, KWG has been consistently paying dividends. Starting from FY13, it became even more generous with its dividend payment, raising its dividend payout significantly to 30% of net profit from only 18% for FY12. Its dividend per share and dividend yield for 2013 instantly nearly doubled to reach CNY0.29 and 6.1%, respectively.

KWG’s management mentioned that it will maintain a dividend payout of 25-30% of core net profit going forward. Hence, based on around a 30% dividend payout on our net profit forecasts for 2015-17, we forecast a DPS of CNY0.34 for 2015 (+3.6% YoY), CNY0.38 for 2016 (+9.6% YoY) and CNY0.42 for 2017 (+11.7% YoY). This translates into high dividend yields of 7.2%, 7.9% and 8.8% in each of the years in 2015-17, respectively.

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KWG Property (1813 HK): 9 November 2015

KWG: dividend per share and dividend yield

(CNY) 1.0 10% 8.75% 7.85% 0.8 7.15% 8% 6.06% 6.89% 0.6 6% 4.60% 3.13% 0.38 0.42 0.4 2.30% 0.29 0.33 0.34 4% 0.22 0.2 0.15 2% 0.11 0.0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E

DPS Dividend yield (RHS)

Source: Company, Daiwa forecasts

Compared with its peers, KWG had among the higher dividend yields for 2014, at 6.9%, well above the sector average of 4.7%.

China developers: dividend yields for 2014

9% Average

6%

3%

0%

COLI

COGO

CR LandCR

Evergrande

SunacChina ChinaVanke

Poly Property Poly

CIFI Holdings

Agile Property

KWG Property

Country Garden

Yuexiu Property

Guangzhou R&F

ShimaoProperty

Sino-OceanLand GreentownChina LongforProperties BeijingCapital Land Source: Bloomberg, Daiwa

11

KWG Property (1813 HK): 9 November 2015

JV projects, a supplementary growth driver

A means to spread risks and leverage on JV partners’ strength Over the past few years, KWG has been increasingly relying on joint venture opportunities in its property development and investment business. Cooperating with other developers makes it easier for the company to obtain quality land plots amid strong competition among developers, which is likely to intensify going forward as the property business becomes more and more challenging and quality plots more and more scarce. At the same time, participating in JV projects lowers the risks and alleviates the financial burden on KWG. Not to mention that it can also leverage on and learn from the expertise of its JV partners in developing and running shopping malls.

Partnering with renowned developers Some of the major The company has been partnering with various reputable developers in recent years in players KWG partnered property development and investment, and the results have been evident, with satisfactory with include China sales performances and high margins being achieved. Vanke, CR Land, Sun Hung Kai Properties, Currently, of KWG’s 55 projects, 20 are JV projects developed with well-known developers Hongkong Land such as Guangzhou R&F, Agile Property, Shimao Property, Longfor Properties, China Vanke, CR Land, Greenland, Sun Hung Kai Properties and Hongkong Land.

KWG: current status of JV projects Attributable Project City Stake GFA Partner Current status (’000 sq m) Suzhou Apex Suzhou 90% 142 Suzhou Jinzhu Residential portion launched in October 2010 Tianhui Plaza Guangzhou 33.3% 91 Guangzhou R&F, Sun Hung Kai Properties Serviced apartments launched in November 2011 Offices launched in September 2013 Global Metropolitan Plaza Guangzhou 50% 73 GT Land Offices launched in December 2013 The Eden Guangzhou 50% 78 Fineland Residential portion launched in October 2013 Chengdu Sky Ville Chengdu 50% 405 Hongkong Land Residential portion launched in October 2012 The Core of Center Shanghai 50% 48 Shanghai Greenland Residential portion and serviced apartments launched in 2011 Amazing Bay Shanghai 50% 94 Guangzhou R&F Residential portion launched in March 2012 Jinnan New Town Tianjin 25% 650 Guangzhou R&F, Agile Property, Shimao Property Residential portion launched in 2011 Leader Plaza Suzhou 51% 37 Suzhou Jia An Offices and serviced apartments launched in December 2013 La Villa Beijing 50% 100 Shimao Property Residential portion launched in March 2014 Beijing Apex Beijing 50% 94 Shimao Property Residential portion launched in April 2014 Oriental Bund Guangzhou 50% 1,400 Sun Hung Kai Properties Residential portion launched in April 2014 Rose and Ginkgo Mansion Beijing 33% 69 Longfor Properties, Greenland Residential portion and villas launched in June 2014 The Core of Center Nanning 87% 567 Guangxi Beibu Gulf Residential portion and villas launched in July 2014 Guangxi Top of World Nanning 87% 486 Guangxi Beibu Gulf Villas launched in December 2014 Residential portion expected to be launched in 2015 The Horizon Guangzhou 35% 158 Fineland Residential portion launched in January 2015 Shine City Nanjing 50% 73 China Vanke Residential portion launched in June 2015 Guangxi International Finance Place Nanning 87% 62 Guangxi Beibu Gulf Offices expected to be launched in 2015 Guangzhou Pazhou Project Guangzhou 50% 50 Dongling Group Offices expected to be launched in 2016 Guangzhou Finance City Project Guangzhou 33.3% 102 Shimao Property, CR Land Retail shops expected to be launched in 2015

Source: Company, Daiwa

Increasing profit contribution KWG’s JV projects started contributing to its profit in 2012, and since then, the contribution has become larger and larger. Looking at its proportionated revenue, the contribution from jointly-controlled entities (JCEs) increased from CNY1,226m in 2012 (11% of proportionated revenue) to CNY4,441m in 2014 (30% of proportionated revenue).

Alongside proportionated revenue from JCEs, KWG’s delivered GFA from JCEs has also been increasing at a fast rate. In 2012, its JCEs delivered 43,000sq m GFA of properties, and this amount had increased to 99,000sq m in 2013 and 344,000sq m in 2014. Meanwhile, KWG’s JCEs have been able to fetch generally higher ASPs for their projects compared to those for KWG’s wholly-owned projects in all 3 years since 2012. In 2014, its recognised ASP for its wholly-owned projects was CNY11,563/sq m, while its proportionated recognised ASP including JCE contribution was some 3% higher at CNY11,958/sq m.

12

KWG Property (1813 HK): 9 November 2015

The contribution from With KWG’s JCEs being able to fetch higher ASPs for projects, their overall margins were JCEs in KWG’s higher than those for KWG’s wholly-owned projects in 2012-14. In 2014, the gross margin proportionated revenue for KWG’s wholly-owned projects was 35.7% while the proportionated gross margin jumped from CNY1,226m including JCE contribution was higher at 37.0%. in 2012 to CNY4,441m in 2014 We anticipate that the profit contribution from KWG’s JCEs will further increase in the next few years, especially if KWG will consider forming more JV projects as a means to acquire landbank at lower costs in upper-tier cities where competition for good land plots are intense.

KWG: revenue and proportionated revenue including JCE contribution

(CNYm) 16,000 14,907 12,506 10,902 12,000 10,123 10,123 10,466 9,676 9,468 7,466 7,466 8,000

4,000

0 2010 2011 2012 2013 2014 Revenue Proportionated revenue (including JCE contribution)

Source: Company, Daiwa

KWG: GFA delivered and proportionated GFA delivered KWG: recognised ASP and proportionated recognised ASP

('000 sqm) ('CNY/sqm) 1,189 1,200 1,036 15,000 12,576 11,958 918 918 937 11,716 11,563 839 845 10,695 10,695 11,153 900 784 784 796 12,000 9,209 9,209 9,582 9,000 600 6,000 300 3,000

0 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 GFA delivered Proportionated GFA delivered (including JCE contribution) Recognized ASP Proportionated recognized ASP (including JCE contribution)

Source: Company, Daiwa Source: Company, Daiwa

13

KWG Property (1813 HK): 9 November 2015

Contract sales and rental income to see decent growth

Contract sales expected to dip in 2015 before picking up in 2016-17 KWG has not always been a fast growth company. It saw very strong contract sales growth before 2011, with contract sales soaring from below CNY1.5bn in 2008 to CNY11.0bn in 2010. Nonetheless, the company’s contract sales growth slowed down considerably in 2011-12 before picking up again in 2013-14. In 2014, KWG achieved contract sales growth of 25.8% YoY to reach CNY20.5bn, while its peers’ saw average contract sales growth of 19% YoY. This year, we look for the company to see an 8% YoY decline in its contract sales to around CNY18.8bn as a result of the delay of a few of its project launches in 4Q15. However, its contract sales performance should recover in 2016 with 17.6% YoY growth to CNY22.1bn. For 2017E, we forecast KWG to deliver 15.3% YoY growth in contract sales to CNY25.5bn.

KWG: contract sales value

KWG’s contract sales (CNYm) value is forecast to dip 30,000 CAGR - 12.7% by 8% in 2015 to 25,480 22,100 CNY18.8bn before 20,500 18,800 20,000 seeing 15-18% annual 16,300 growth to CNY22.1bn 11,500 12,200 and CNY25.5bn in 2016 11,000 and 2017, respectively 10,000

0 2010 2011 2012 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

In terms of the contract sales amount in square metres, KWG has been able to achieve growth since 2010 besides the slight decline in 2011. For 2015, we forecast a dip in the company’s contract sales amount to 1.40m sq m (-6.1% YoY) before picking up to reach 1.64m sq m in 2016 (+17.0% YoY) and 1.88m sq m in 2017 (+15.0% YoY).

KWG: contract sales amount ('000 sqm)

3,000 CAGR - 10.0%

1,881 2,000 1,636 1,489 1,398 1,182 968 925 932 1,000

0 2010 2011 2012 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

As a result of KWG’s consistent focus on mid- to high-end property development in China’s upper-tier cities, its contracted ASPs over the past few years have been generally higher than those of many of its peers, and have seen considerable growth on the back of increasing home prices in the major cities. Nonetheless, we expect the company’s contracted ASPs in 2015-17 to stay mostly flat at CNY13,450-13,544/sq m due to a more balanced sales contribution from tier-1 and tier-2 cities. That said, we believe its average contracted ASPs in the next few years should still be higher than those of many China developers.

14

KWG Property (1813 HK): 9 November 2015

KWG: contract sales ASP (CNY/sqm)

15,000 13,790 13,450 13,544 12,400 13,768 13,512 13,100 10,000 11,400

5,000

0 2010 2011 2012 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

Contract sales performance in the first 10 months Sales for 10M15 declined by 16% YoY KWG’s 10M15 contract For 2015, KWG has set a contract sales target of CNY22.5bn, which is some 10% above sales were down 16% its achieved sales of CNY20.5bn in 2014. In the first 10 months of this year, the company YoY, underperforming recorded CNY15.8bn in contract sales value or 1.19m sq m of sales amount, down 16% the 8% growth for its and 3% YoY, respectively. The contracted ASP achieved during the period was around peers CNY13,296/sq m, 14% below its contracted ASP of CNY15,405/sq m in 9M14. In terms of sales target completion, KWG has completed 70% of its CNY22.5bn sales target so far this year.

KWG: monthly contract sales and ASP

(CNYm) (CNY/sqm) 3,000 25,000

2,500 20,000 2,000 15,000 1,500 10,000 1,000

500 5,000

0 0 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Contract sales ASP (RHS)

Source: Company, Daiwa

Sales performance and target completion underperformed peers Comparing KWG’s contract sales performance and sales target completion in 10M15 with its peers, KWG clearly underperformed. The company’s 16% YoY sales decline in 10M15 was well below the sector average of 8% sales growth during the period, while its 70% sales target completion is lower than peers’ 77% average completion.

Guangxi office project to be launched in 4Q15 One brand new project KWG originally had total saleable resources of CNY38bn for 2015 and 9 brand new to be launched in the projects to be launched for sale. However, one of these brand new projects, namely the remainder of this year, Shanghai Pudong office project, will be sold en bloc and the sale of this project is unlikely which is an office project to be completed within this year. Another office project in Guangzhou, namely Guangzhou in Nanning Finance City, will now be held for investment purposes rather than being sold. Meanwhile, its Beijing Tongzhou project will be launched next year instead, due to a delay in obtaining pre-sales permit. Hence, KWG has 6 brand new projects for launch in 2015. Two of these brand new projects, Tianjin Boulevard Terrace I and The Horizon in Nansha in Guangzhou, were launched in 1H15 and over 60-70% of the units launched have already been sold at these projects. Guangzhou Essence of City and Tianjin Boulevard Terrace II were both launched in July and have received a favourable response from the market. Hangzhou The

15

KWG Property (1813 HK): 9 November 2015

More was launched right before “Golden Week” in October and hence, we should start to see a sales contribution from this project in October.

The remaining one brand new project for this year, Guangxi International Finance Place, an office project, is scheduled for launch in 4Q15. The project has a saleable area of about 30,000sqm and the estimated ASP is around CNY10,000-12,000/sq m.

CNY18.8bn of sales forecast for 2015, falling short of its target As a result of the delay in new project launches and the switching of an office project into an investment property, we forecast KWG to achieve only around CNY18.8bn in contract sales for 2015, which is 8.3% below its achieved sales of CNY20.5bn in 2014. In terms of sales target completion, we anticipate the company will fall short of its CNY22.5bn contract sales target by 16%. However, we see this as mainly a timing issue and do not think this suggests that its products are not in demand – its attributable unbooked contract sales as at end-June 2015 amounted to CNY23bn.

Potential sales target miss largely factored into recent weak share price The next focus is on 2016 contract sales performance We believe KWG’s slow sales this year and potential sales target miss have been largely factored into its recent weak share-price performance. With its weak 2015 sales behind it, we think the next thing investors will look for in KWG will be its 2016 sales performance, and how it will improve its sales from the weak performance in 2015. For 2016, we forecast contract sales of around CNY22.1bn for the company, up 17.6% from our estimated sales of CNY18.8bn for 2015. The brand new projects that are saleable include Shanghai Pudong office project, Beijing Tongzhou I and II, The Star in Guangzhou and also, the Zhengzhou project.

More emphasis on profitability instead of merely chasing sales growth KWG’s management is According to KWG’s management, the company will put more emphasis on achieving high guiding for 10-20% profitability instead of just chasing contract sales growth going forward. It guides for around annual sales growth for 10-20% annual sales growth in the next few years. We think the company is heading in the the next few years. It will right direction amid a rational adjustment and tougher operating environment in the China put more emphasis on property industry. It appears to us that some developers have been too obsessed with high profitability instead chasing scale and contract sales numbers which has only resulted in falling margins and of high sales growth minimal growth in earnings. Now that the industry is normalizing and becoming more going forward rational, we think the key for success for developers is to achieve steady sales growth and at the same time, maintain profitability.

Top and bottom lines should still see decent growth over the next few years Unbooked contract sales sufficient to support growth Despite our forecast for lower contract sales this year for KWG, we believe the company will still be able to see decent growth in revenue and earnings over the next few years. As at end-June 2015, KWG had unbooked attributable contract sales (proportionated) of CNY23bn, which is sufficient to support our revenue growth forecasts of 14.9% and 17.2% to reach CNY12,029m for 2015 and CNY14,104m in 2016, respectively.

Meanwhile, as we believe KWG to be able to maintain its high margins, we also expect decent growth in its net profit to CNY3,006m for 2015 (+16.6% YoY) and CNY3,566m in 2016 (+18.7% YoY).

16

KWG Property (1813 HK): 9 November 2015

On the right track to develop its commercial properties Investment property portfolio contributed to 5% of 2014 revenue While KWG currently derives most of its revenue from property development, it is looking to expand its investment property portfolio to generate stable recurring cash inflow. As at end-June 2015, the company had 6 investment property projects in operation, including International Finance Place in Guangzhou, Four Points by Sheraton in Guangzhou, Sheraton Resort in Guangzhou, W hotel in Guangzhou, The Mulian Guangzhou and also, The Mulian Hangzhou. These investment properties generated about CNY479m and CNY257m of revenue in 2014 and 1H15, respectively, accounting for 4.6% and 6.5% of KWG’s total revenue during the 2 periods.

U Fun, a shopping mall Six investment property projects in the pipeline in Shanghai jointly KWG has 6 more investment property projects in the pipeline, including U Fun in developed with Shanghai, Tian Hui Plaza in Guangzhou, the Conrad Hotel in Guangzhou, M. Cube in Guangzhou R&F, will be Beijing, a shopping mall at Chengdu Cosmos and another shopping mall at Suzhou Apex. launched early next year and was 80% preleased U Fun, a shopping mall in the Shanghai Amazing Bay project jointly developed with as at end-October 2015 Guangzhou R&F, will be launched early next year and will be KWG’s first shopping mall. As at end-October 2015, the mall was 80% preleased and anchor tenants include global fashion brands (ie, UNIQLO, H&M), a supermarket and a children’s playground.

To leverage on experience and knowledge gained from JV projects KWG’s next mall to start operating will be Tian Hui Plaza in Pearl River New Town in Guangzhou, which we expect to be launched in 1Q16. This is a JV project with Sun Hung Kai Properties, which will lead the development and operations of the mall. With the experience and knowledge on commercial property development and management that KWG will learn from these JV projects, we believe it will be equipped and prepared for its wholly owned shopping malls in Beijing and Chengdu, due to launch in 4Q16.

KWG: investment property portfolio Attributable Year opened/ Project Location Stake Product type GFA Expected launch date More info (’000 sqm) International Finance Place Pearl River New Town, 100% Office 61 2007 Above 95% occupancy in recent 3 years Guangzhou Four Points by Sheraton Dongpu, Guangzhou 100% Hotel 35 2009 Urban four-star hotel targeted at business people Sheraton Resort Huadu, Guangzhou 100% Hotel 25 2011 First internationally renowned five-star resort hotel in Guangzhou W Hotel Pearl River New Town, 100% Hotel 80 2013 First W Hotel in Mainland China Guangzhou The Mulian Guangzhou Pearl River New Town, 100% Hotel 8 2014 First boutique hotel owned and managed by KWG Guangzhou The Mulian Hangzhou Future Science City, Hangzhou 100% Hotel 18 2015 Located in the "Silicon Valley" district of Hangzhou; across from the Alibaba headquarters in Hangzhou U Fun Xinjiangwan, Shanghai 50% Shopping mall 107 1Q16 JV with Guangzhou R&F, which is responsible for the development of the mall Tian Hui Plaza Pearl River New Town, 33.3% Shopping mall 115 1Q16 JV with Sun Hung Kai Properties, which will lead the Guangzhou development and operations of the mall Conrad Hotel Pearl River New Town, 33.3% Hotel 40 2H16 Guangzhou Part of the Tian Hui Plaza development M. Cube Chongwenmen, Beijing 100% Shopping mall 30 4Q16 First wholly owned shopping mall Shopping mall of Chengdu Tianfu New Town, Chengdu 100% Shopping mall 150 1H17 Cosmos Upscale shopping mall next to the W Hotel Shopping mall of Suzhou Apex Mudu Town, Suzhou 90% Shopping mall 120 2H17 Residential portion already launched in 2010 Total 789

Source: Company, Daiwa

Investment property revenue to see more than at least 20% YoY growth for each of 2015-17 With 5 shopping malls and 1 hotel to be launched from 2016, we anticipate that KWG’s income from its investment property portfolio will see rapid growth in the following years. We forecast its investment property revenue to reach CNY575m for 2015 (+20% YoY), CNY736m for 2016 (+28% YoY) and CNY973m for 2017 (+32% YoY).

17

KWG Property (1813 HK): 9 November 2015

We forecast KWG’s Meanwhile, as more shopping malls will be launched in 2016-17, we expect the proportion investment property of its investment property income coming from offices and retail to increase. We forecast revenue to reach the proportion of KWG’s rental income from its offices and retail space to rise from only CNY575m, CNY736m and 29% for 2015 (CNY169m, +15% YoY) to 36% for 2016 (CNY262m, +55% YoY) and 43% CNY973m for 2015-17 for 2017 (CNY414m, +58% YoY). respectively KWG: revenue from investment property portfolio (CNYm) 1,200 973 1,000 736 800 575 559 600 479 348 474 400 209 227 406 181 332 203 200 84 414 57 70 262 124 139 143 145 147 169 0 2010 2011 2012 2013 2014 2015E 2016E 2017E

Office/retail Hotel

Source: Company, Daiwa forecasts

18

KWG Property (1813 HK): 9 November 2015

Solid earnings growth & stable financial position Earnings outlook Higher recognised GFA but we expect a lower ASP for 2015 For 2015, we forecast decent YoY growth of 16.8% for KWG’s recognised GFA, reaching 987,000sqm. The major projects to be booked in the top-line will include The Summit in Zengcheng, The Sapphire in Suzhou, Suzhou Apex, Suzhou Jade Garden, Suzhou Emerald, The Core of Center in Nanning. For 2016 and 2017, we forecast further growth in the company’s recognised GFA, to 1,021,000sqm (+3.4% YoY) and 1,108,000sqm (+8.5% YoY).

In terms of recognised ASP, we expect a slightly lower ASP of CNY11,345/sq m for 2015 (-5.4% YoY) due to the booking of projects with a lower ASP, ie, The Summit in Zhengcheng, The Sapphire and Suzhou Apex in Suzhou. However, we expect to see a higher recognised ASP of CNY12,822/sq m (+13.0% YoY) for 2016, due to the booking of more projects in China’s tier-1 cities, which have higher ASPs. For 2017, we forecast a slightly higher recognised ASP of CNY13,423/sq m (+4.7% YoY).

KWG: recognised GFA and ASP

('000 sqm) (CNY/sqm)

2,000 13,423 15,000 12,576 12,822 11,153 11,958 11,345 12,000 1,500 10,695 9,209 1,021 1,108 9,000 918 937 987 1,000 784 796 845 6,000 500 3,000

0 0 2010 2011 2012 2013 2014 2015E 2016E 2017E

Recognized GFA Recognized ASP (RHS)

Source: Company, Daiwa forecasts

We expect core profit to see higher growth than revenue over 2015-17 Given our forecasts of a higher recognised GFA and no huge declines in recognised ASPs We forecast KWG’s in the following years, we anticipate double-digit revenue growth for KWG for each of the 3 revenue to see 14.9% years over 2015-17. We forecast revenue to reach CNY12,029m for 2015 (+14.9% YoY), YoY, 17.2% and 14.6% CNY14,104m for 2016 (+17.2%) and CNY16,168m for 2017 (+14.6%). growth in 2015-17 respectively. Meanwhile, We expect to see higher growth in KWG’s core net profit than its revenue over the same we expect its core profit period, largely due to the rapid growth in its share of profit from its JV projects. We to record 16.6%, 18.7% estimate that the company’s share of profit from its JV projects will rise, from CNY1,542m and 15.4% YoY increases for 2014 to CNY1,795m for 2015 (+16.4% YoY), CNY2,247m for 2016 (+25.2% YoY) and over the same period CNY2,823m for 2017 (+25.6% YoY). Meanwhile, we forecast a core profit (excluding valuation gains on investment properties) of CNY3,006m for 2015 (+16.6% YoY), CNY3,566m for 2016 (+18.7% YoY) and CNY4,117m for 2017 (+15.4% YoY).

19

KWG Property (1813 HK): 9 November 2015

KWG: revenue and core net profit (CNYm) 20,000 16,168 16,000 14,104 12,029 10,466 12,000 10,123 9,676 9,468 7,466 8,000 4,117 3,006 3,566 4,000 2,343 2,577 1,243 1,860 1,951 0 2010 2011 2012 2013 2014 2015E 2016E 2017E Revenue Core net profit

Source: Company, Daiwa forecasts

Declining gross margin but higher net margin Due to more competition over quality land plots and, hence, higher land costs in the upper- tier cities, we expect KWG, like many other China developers, to see a down trend in its gross margin over 2015-17. We forecast the gross margin to rise slightly for 2015 to 35.7% (+0.2pp) before trending down to 34.8% for 2016 (-0.9pp) and 34.2% for 2017 (-0.6pp). According to KWG’s management, the company aims to maintain a gross margin of 30- 35% in the medium term.

Despite our forecasts of a declining gross margin over 2015-17, we expect a higher net margin for KWG over this period as a result of the increasing profit contribution from its JVs and associates. We forecast a core net margin of 25.0% for 2015 (+0.4pp), 25.3% for 2016 (+0.3pp) and 25.5% for 2017 (+0.2pp).

KWG: gross margin and core net margin

Net margin is on an 50% uptrend despite a 41.5% 44.2% 40% 36.5% declining gross margin, 36.2% 35.5% 35.7% 34.8% due to higher profit 34.2% 30% contribution from JVs 25.0% 25.5% and associates 20% 24.7% 24.6% 25.3% 20.2% 16.6% 18.4% 10%

0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Gross margin Core net margin

Source: Company, Daiwa forecasts

Financial position We expect operating net cash inflow for the whole of 2015 For 2015, we forecast an operating net cash inflow of CNY980m. We estimate cash collected from contract sales of around CNY17,480m (largely from CNY18,400m of contract sales for 2015E, and partly from CNY20,500m of contract sales for 2014). We estimate an operating cash outflow of CNY16,500m for 2015, including CNY1,000m in land premiums, CNY9,000m in construction costs, CNY1,600m in selling, marketing and administration expenses, CNY2,300m in interest expenses and CNY2,600m in taxes.

Net gearing to remain at acceptable levels despite higher net debt in 2015-17 KWG’s net debt level nearly doubled, from CNY7,056m for 2010 to CNY13,642m for 2014. Nonetheless, the company has been able to maintain its net gearing ratio at an acceptable level. As at end-2014, it recorded a net gearing of 66.8%, which is in line with the average of its peers, at 67.9%. Over 2015-17, we forecast KWG’s net debt to rise further, reaching CNY15,924m for 2015 (+16.7% YoY), CNY18,585m for 2016 (+16.7% YoY) and CNY21,510m for 2017 (+15.7% YoY). In terms of net gearing, we estimate this will remain

20

KWG Property (1813 HK): 9 November 2015

at an acceptable level of 67.8% for 2015 (+1.0pp), 68.2% for 2016 (+0.4pp) and 68.1% for 2017 (-0.1pp).

KWG: net debt and net gearing

We expect KWG’s net (CNYm) gearing to be flat, at 40,000 80% 67.8% 68.2% 68.1% around 68% for 2015-17 62.7% 63.8% 66.8% 60.9% 56.3% 30,000 60% 21,510 18,585 20,000 15,924 40% 13,642 8,461 9,746 10,047 10,000 7,056 20%

0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E Net debt Net gearing (RHS)

Source: Company, Daiwa forecasts

We anticipate declining Average borrowing cost on a down trend average borrowing costs KWG saw its weighted average borrowing cost peak at 10.78% for 2012, before falling to for KWG, reaching 7.80% 8.80% for 2013 and 8.30% for 2014. For 2015, we expect its average borrowing cost to for 2015, 7.50% for 2016 see a considerable decline, reaching 7.80% as a result of the 5 interest rate cuts since and 7.30% for 2017 November 2014. For 2016, we anticipate a further decline in the average borrowing cost to 7.50%, as the company is planning a domestic corporate bond issuance at a lower cost to repay its higher-cost debt. As for 2017, we forecast a slightly lower average borrowing cost of 7.30%.

KWG: weighted average borrowing cost

12%

10% 10.78% 8.80% 8.30% 7.80% 8% 8.91% 7.50% 7.30%

6% 6.71%

4%

2%

0% 2010 2011 2012 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

21

KWG Property (1813 HK): 9 November 2015

Valuation Initiate with Buy (1) rating and target price of HKD7.41 Our NAV estimate and target discount to NAV NAV is our preferred approach to value property companies We regard the NAV as the best approach to value property companies, as it is based on the market value of a company’s property assets. Moreover, property companies typically trade at a discount to their appraised NAV to reflect: 1) their capabilities in project execution and property sales, as well as their long-term sales growth potential, 2) their market risk and diversification, and 3) their corporate risk (eg, corporate governance and financial position).

We value KWG’s end-2016 NAV at HKD14.82/share Based on KWG’s existing landbank of 10.6m sq m, we estimate an end-2016 total GAV of CNY60,292m by discounting its estimated future net cash flow to be generated using a WACC of 12.68%. The company’s development properties account for 68% of the GAV, and its investment properties account for the remaining 32%.

Assuming an end-2016 net debt of CNY18,585m and outstanding land premium of CNY2,000m, we calculate an end-2016 NAV of CNY39,707m. Based on outstanding share capital of 2,947m shares, as at end-June 2015, we derive a NAV per share of CNY13.47 or HKD14.82 for KWG.

KWG: WACC Rate assumptions Risk-free rate 3.1% Risk premium 10.0% Beta 1.34 Cost of equity 16.5% Cost of debt 5.6% Debt/Assets 35.0% WACC 12.68%

Source: Daiwa forecasts

KWG: NAV breakdown KWG’s development (CNY m) End-2016 NAV % of GAV properties and Development properties: Guangzhou 15,296 25.4 investment properties Foshan 1,605 2.7 account for 68% and Shanghai 3,287 5.5 32% of its end-2016 total Suzhou 403 0.7 Chengdu 2,828 4.7 GAV respectively Beijing 5,389 8.9 Tianjin 796 1.3 Hainan 4,742 7.9 Hangzhou 700 1.2 Nanning 4,636 7.7 Zhengzhou 362 0.6 Nanjing 940 1.6 Development property NAV 40,983 68.0 Investment properties: Guangzhou 9,989 16.6 Shanghai 2,106 3.5 Beijing 445 0.7 Chengdu 1,877 3.1 Suzhou 1,820 3.0 Hainan 2,003 3.3 Nanning 461 0.8 Foshan 337 0.6 Hangzhou 139 0.2 Tianjin 132 0.2 Investment property NAV 19,309 32.0 GAV 60,292 100.0 Net debt (18,585) Outstanding land premium (2,000) NAV 39,707 Shares (m) 2,947 NAV/Share (CNY) 13.47 NAV/Share (HKD) 14.82

Source: Daiwa forecasts

22

KWG Property (1813 HK): 9 November 2015

We apply a 50% discount to KWG’s NAV Based on our estimated NAV of HKD14.82/share for KWG and its last trading price of HKD5.83 on 6 November, its shares are now trading at a 61% discount to NAV. KWG’s current NAV discount is in line with that of its Hong Kong-listed mid-cap peers’ average of 50-70% discount to market NAV.

We believe KWG deserves a narrower NAV discount compared to its peers due to its consistent development strategy, its quality landbank in the upper-tier cities, potentially higher margins and better profitability than peers in the following years, and healthy financial position due to its prudent landbank expansion. Hence, we decide to apply a 50% target discount to KWG’s NAV, which is at the lowest end of the mid-cap Hong Kong-listed China developers’ current valuation range.

Initiate coverage with a Buy (1) rating and target price of HKD7.41 Applying a 50% target discount to KWG’s end-2016 NAV per share of HKD14.82, we arrive at our target price of HKD7.41, which translates into 2015E PER of 6.0x and 2016E PER of 5.0x. As the stock was trading at HKD5.83 (6 November), our target price of HKD7.41 represents 27% upside potential from current share price levels. We have a Buy (1) rating on KWG.

KWG’s share price has Share-price performance and current valuation underperformed that of Share-price has outperformed peers YTD its peers’ in the past In the past one month (6 October-5 November) the share prices of the China property month but has sector picked up by 7% on average, above the 1% increase in the HSCEI. During the past outperformed peers’ YTD month, KWG’s share price dropped by 1%, underperforming its peers, which we think is largely attributable to its slow sales relative to peers and because investors expect it to miss its sales target. However, KWG’s share price has outperformed its peers so far this year. YTD, its share price has risen by 8%, compared to the 3% overall increase for the China property players.

KWG: share price (HKD) 10

8

6

4

2

0 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15

Source: Bloomberg, Daiwa

Current NAV discount at 2010-15 mean discount -1SD KWG is now trading at a Currently, KWG is trading at a 61% discount to our end-2016 NAV estimate of HKD14.82, 61% discount to our NAV in line with the average discount of its mid-cap peers of 50-70% to market NAV. Compared estimate, in line with the to its 2010-15 valuation, KWG’s current discount of 61% is much lower than its 2010-15 average discount of 50- mean discount of 51%, and just slightly above its 2010-15 mean discount -1SD of 63%. 70% for its mid-cap This indicates that its current valuation is cheap. peers, but well below its 2010-15 mean discount of 51%

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KWG Property (1813 HK): 9 November 2015

KWG: historical discount to NAV (%)

0

(20)

(40) +1SD -38.9% Mean -51.0%

(60) -1SD -63.1% (80) 2010 2011 2012 2013 2014 2015

Source: Bloomberg, Daiwa

2015E and 2016E PERs below 2010-15 mean PER In terms of PER, KWG’s share price is now trading at 4.7x 2015E PER and 3.9x 2016E PER. Compared to its peers’ average 2015E and average 2016E PER of 7.3x and 6.2x respectively (based on Bloomberg consensus forecasts), KWG’s 2015-16E PERs are much lower. Compared to its own 2010-15 PER, the company’s 2015E and 2016E PERs are in between its 2010-15 mean PER -1SD of 3.6x and 2010-15 mean PER of 7.0x, which is also relatively cheap.

KWG: PER (x) 20

15

+1SD - 10.4x 10 Mean - 7.0x

5 - 1SD - 3.6x 0 2010 2011 2012 2013 2014 2015

Source: Bloomberg, Daiwa

2015E and 2016E PBR close to a 2010-15 mean PBR -1SD Our financial estimates for KWG translate into 2015E and 2016E PBR of 0.6x and 0.5x respectively. These are slightly lower than peers’ Bloomberg consensus 2015E and 2016E PBR of 0.8x and 0.7x respectively. However, its 2015E and 2016E PBR are much lower than its 2010-15 mean PBR of 0.8x and are close to its 2010-15 mean PBR -1SD of 0.5x.

KWG: historical PBR (x) 1.8 1.6 1.4 1.2 +1SD - 1.1x 1.0 Mean - 0.8x 0.8 0.6 0.4 - 1SD - 0.5x 0.2 0.0 2010 2011 2012 2013 2014 2015

Source: Bloomberg, Daiwa

24

KWG Property (1813 HK): 9 November 2015

Risks

Housing demand dries up as economy deteriorates Since 2011 when home purchase restrictions (HPR) were introduced in China, the property market has been largely supported by first-home buyers. In 2014, the HPR was removed in most China cities and many upgraders have since entered the market. This year, we observe that housing demand from these end-users has generally slowed down. Despite a few interest rate and reserve requirement ratio cuts, we have not seen a meaningful pickup in home sales. With overall growth in the China economy set to slow in 2016, we are concerned that housing demand will become even slower, which would drag down the contract sales performances of the China developers, including KWG’s, in the years to come. We would see this as the main risk to our Buy (1) rating on the stock.

Delays in new project launches, which could affect KWG’s contract sales performance With 10.6m sq m of GFA of attributable landbank on hand and 47% located in China’s tier- 1 cities, KWG’s saleable resources is more than sufficient to support our annual contract sales growth forecasts of 17.6% YoY for 2016 and 15.3% YoY for 2017 for the company. Nonetheless, there is always a possibility that its project launches will be delayed due to the delayed issuance of pre-sales permits by the housing authorities or internal decisions at KWG to push back projects. Under these circumstances, the company’s contract sales performance would be affected and our sales growth forecasts might not be realised. We see this as the secondary risk to our call on the stock.

Intense competition in the upper-tier cities over land plots As many developers have expressed the intention of expanding their property businesses in the upper-tier cities, where housing demand-supply dynamics are more balanced and margins are generally higher, competition over quality land plots has become more intense. Consequently, land costs have been pushed higher and a downtrend in gross margins seems highly likely. KWG could potentially face the same problems of higher land costs and lower margins in the upper-tier cities when it has to replenish its landbank in these cities.

25

KWG Property (1813 HK): 9 November 2015

Appendix I: company background Mid- to high-end property developer 10.6m sqm landbank in 12 cities Based in Guangzhou, KWG Property was established by Chairman Kong Jian Min in 1995. Over 1995-2006, the company focused on the development of mid- to high-end residential properties in Guangzhou. Since 2007, it has expanded outside of Guangzhou and entered 10 cities. Currently, it focuses mainly on the development of mid- to high-end residential properties, serviced apartments, hotels, offices and retail space. It has 55 projects with a total attributable landbank of 10.6m sq m in 12 cities, including Guangzhou (36.1%), Foshan (13.2%), Nanning (10.5%), Chengdu (8.6%), Tianjin (6.9%), Hainan (6.4%), Beijing (5.5%), Shanghai (5.4%), Suzhou (4.3%), Hangzhou (2.2%), Nanjing (0.7%) and Zhengzhou (0.3%).

KWG: Corporate milestones 1995 - Chairman Kong Jian Min established KWG 1995-2006 - Property development in Guangzhou - Became a high-end market leader with quality projects in Pearl River New Town 2007 - Entered Suzhou, Chengdu and Hainan - Listed in Hong Kong in July 2007 2008 - Launched first project in Suzhou - Entered Beijing 2009-2010 - Launched projects in Beijing and Chengdu - Entered Tianjin and Shanghai 2011 - Launched projects in Tianjin and Shanghai 2012 - Launched projects in Hainan 2013 - Entered Nanning and Hangzhou 2014 - Launched projects in Nanning and Hangzhou - Entered Zhengzhou 2015 - Entered Nanjing

Source: Company, Daiwa

KWG has been prudent Prudent landbank expansion in its landbank KWG has been prudent in its landbank expansion. Over 2007-10, its attributable landbank expansion and has only increased very rapidly from 4.9m sq m in 2007 to 8.4m sq m in 2010. However, in the past increased its landbank 5 years since then, KWG’s landbank expansion has slowed considerably as its attributable by 2.2m sq m to 10.6m landbank has only increased by 2.2m sqm from 8.4m sqm in 2010 to 10.6m sqm as at end- sq m over 2010-15 August 2015.

KWG: existing and newly added landbank

(m sqm) 12 10.0 10.1 10.6 10 9.0 9.2 0.9 8.4 1.3 1.1 2.1 8 1.1 2.1 6 9.7 4 7.9 8.1 7.9 8.8 6.3 2

0 2010 2011 2012 2013 2014 8M15 Existing landbank Newly-added landbank

Source: Company, Daiwa

26

KWG Property (1813 HK): 9 November 2015

Changing landbank mix to diversify and optimise its landbank KWG has been changing Despite KWG’s slow landbank expansion since 2010, it has been changing its landbank its landbank mix by city mix by city to diversify and optimise its landbank. Guangzhou has remained a major focus to diversify and optimise of the company’s property business and has accounted for 35-40% of its total landbank its landbank, but since 2010. It has been increasing its landbank exposure in Beijing and Nanning over the Guangzhou has past 5 years, which now account for 6% and 10% of its total attributable landbank remained a major focus respectively. Meanwhile, we have seen a considerable decline in the company’s landbank of its property business exposure in Chengdu and Suzhou, as it has ventured into other new cities like Nanning, Hangzhou, Zhengzhou and Nanjing. As at the end of August 2015, KWG’s landbank exposure in Chengdu and Suzhou accounted for 9% and 4% of its total attributable landbank respectively, compared with 21% and 10% in 2010.

KWG: map of its landbank

Source: Daiwa

KWG: landbank breakdown by city

100%

80%

60%

40%

20%

0% 2010 2011 2012 2013 2014 End-Aug 2015 Guangzhou Chengdu Suzhou Tianjin Foshan Shanghai Hainan Beijing Nanning Hangzhou Zhengzhou Nanjing

Source: Company, Daiwa

27

KWG Property (1813 HK): 9 November 2015

Experienced management team KWG has a well-organised and experienced property development management team. Most of the team have been with the company for a long time and have extensive experience in operations, management or the property-development business.

Management profile Position Brief introduction Kong Jian Min Founder, Chairman and executive director Mr Kong has over 20 years’ experience in property development and investment. He is primarily responsible for KWG's development strategies and supervising project planning, business operations and sales and marketing. Kong Jian Tao CEO and executive director Mr Kong is a brother of Kong Jian Min and Kong Jian Nan. He has over 20 years’ experience in property development and is responsible for the overall operations of KWG's project. Kong Jian Nan Executive vice-president and executive director Mr Kong is a brother of Kong Jian Min and Kong Jian Tao. He is responsible for coordinating and managing HR, administrative management, IT management and KWG’s legal affairs. Li Jian Ming Vice President of operations management and Mr Li joined KWG in 1995 and once held the position of vice-president in the executive director engineering management division. He is now responsible for internal and regional engineering management, tenders, group procurement and product standardisation at KWG. Tsui Kam Tim CFO, Company Secretary and executive Mr Tsui joined KWG in January 2007 as CFO and was appointed an executive director director in November 2007. He is primarily responsible for the financial management and supervision of financial reporting, corporate finance, treasury, tax, risk management and other finance-related matters.

Source: Company, Daiwa

28

KWG Property (1813 HK): 9 November 2015

KWG: landbank summary Name of project City Stake Product type Attributable GFA Attributable End-2016 NAV ('000 sq m) (CNYm) The Summit Guangzhou 100% Residential/ villas/ serviced apt/ office/ retail 1,885 6,627 Global Metropolitan Plaza Guangzhou 50% Office/ retail 73 1,555 Tian Hui Plaza (The Riviera, Top Plaza) Guangzhou 33.3% Serviced apt/ office/ hotel/ retail 91 1,448 The Star (Biological Island I & II) Guangzhou 100% Serviced apt/ office/ retail 199 1,722 Top of World Guangzhou 100% Villas/ serviced apt/ office/ retail/ hotel 567 2,087 The Eden Guangzhou 50% Residential/ retail 78 517 Zengcheng Gua Lv Lake Guangzhou 100% Villas/ hotel 43 495 Essence of City (Ta Gang Project) Guangzhou 100% Residential/ villas/ retail 344 1,627 Guangzhou Pazhou Project Guangzhou 50% Office/ retail 50 420 Guangzhou Finance City Project Guangzhou 33.3% Serviced apt/ office/ retail 102 2,380 The Horizon (Nansha Project) Guangzhou 35% Residential/ retail 158 1,034 International Finance Place Guangzhou 100% Office/ retail 61 2,460 Four Points by Sheraton Guangzhou Guangzhou 100% Hotel 35 635 Sheraton Guangzhou Huadu Resort Guangzhou 100% Hotel 25 155 W Hotel/W Serviced Apartments Guangzhou 100% Hotel/ serviced apt 80 1,463 The Mulian Guangzhou Guangzhou 100% Hotel/ retail 8 161 Residual projects Guangzhou 41 498 Oriental Bund Foshan 50% Residential/ retail/ serviced apt/ office/ hotel 1,400 1,942 Pearl Coast Hainan 100% Villas/ residential/ hotel 236 2,387 Moon Bay Project Hainan 100% Villas/ residential/ retail/ hotel 447 4,358 The Sapphire Suzhou 100% Residential/ hotel/ serviced apt/ office/ retail 114 1,010 Suzhou Apex Suzhou 90% Residential/ hotel/ serviced apt/ retail 142 1,111 Suzhou Emerald Suzhou 100% Residential/ retail 71 - Leader Plaza Suzhou 51% Serviced apt/ office/ retail 37 - Wan Hui Plaza (CRH New City) Suzhou 100% Office/ retail 60 - Suzhou Jade Garden Suzhou 100% Residential/ retail 10 - Residual projects Suzhou 18 201 Hangzhou Jade Garden Hangzhou 100% Residential 47 - Hangzhou La Bali (Science City II) Hangzhou 100% Residential/ villas 58 - The More (Science City III) Hangzhou 100% Residential 106 700 The Mulian Hangzhou Hangzhou 100% Hotel/ retail 18 139 Pudong Project Shanghai 100% Office/ retail 78 - The Core of Center Shanghai 50% Residential/ serviced apt/ retail/ office 48 - Shanghai Apex Shanghai 100% Residential/ serviced apt/ retail/ hotel 69 535 Shanghai Sapphire Shanghai 100% Serviced apt/ hotel/ retail 76 1,844 Shanghai Emerald Shanghai 100% Residential/ retail 7 - Amazing Bay Shanghai 50% Residential/ office/ retail/ serviced apt/ retail 94 771 Vision of the World Shanghai 100% Residential/ serviced apt/ retail 200 1,688 Shine City Nanjing 50% Residential/ office/ retail 73 940 The Core of Center Nanning 87% Residential/ villas/ office/ retail 567 794 Guangxi International Finance Place Nanning 87% Office/ retail 62 - Guangxi Top of World Nanning 87% Residential/ villas/ hotel/ retail 486 4,859 Fragrant Seasons Beijing 100% Residential/ villas/ serviced apt/ retail 28 - La Villa Beijing 50% Residential/ office/ retail 100 512 Beijing Apex Beijing 50% Residential/ villas/ serviced apt/ office/ retail 94 1,018 Chong Wen Men Beijing 100% Retail 16 445 Summer Terrace (Haidian Project) Beijing 100% Residential/ villas/ retail 27 - Beijing Tongzhou I Beijing 100% Serviced apt/ office/ retail 128 1,742 Beijing Tongzhou II Beijing 100% Serviced apt/ office/ retail 125 1,646 Rose and Ginkgo Mansion Beijing 33% Residential/ villas 69 371 Jinnan New Town Tianjin 25% Residential/ serviced apt/ retail 650 928 Boulevard Terrace I (Shuanggang I) Tianjin 100% Residential/ retail 55 - Boulevard Terrace II (Shuanggang II) Tianjin 100% Residential/ villas/ retail 32 - The Vision of the World Chengdu 100% Residential/ serviced apt/ retail 5 - Chengdu Cosmos Chengdu 100% Residential/ office/ serviced apt/ retail/ hotel 499 1,877 Chengdu Sky Ville Chengdu 50% Residential/ office/ serviced apt/ retail/ hotel 405 2,828 Zhengzhou Project Zhengzhou 100% Residential/ retail 29 362 Total 10,626 60,292

Source: Company, Daiwa

29

KWG Property (1813 HK): 9 November 2015

Appendix II: major development properties

The Summit Oriental Bund

The Summit Oriental Bund Location Zengcheng, Guangzhou Location Chancheng District, Foshan Stake 100% Stake 50% Attributable GFA 1,885,000 sq m Attributable GFA 1,400,000 sq m Products Residential, serviced apt, office, retail Products Residential, serviced apt, retail, office Date of first launch Mar 2010 Date of first launch Apr 2014 Current/expected ASP Apartments - CNY8,800/sq m Current/expected ASP CNY9,000/sq m

Source: Company, Daiwa Source: Company, Daiwa

The Core of Center Vision of the World

The Core of Center Vision of the World Location Wuxiang New District, Nanning Location Fengxian District, Shanghai Stake 87% Stake 100% Attributable GFA 567,000 sq m Attributable GFA 200,000 sq m Products Apartments, villas, office, retail Products Residential, serviced apt, retail Date of first launch Jul 2014 Date of first launch 2014 Current/expected ASP Apartments – CNY7,500/ sq m Current/expected ASP CNY27,000/ sq m

Source: Company, Daiwa Source: Company, Daiwa

Beijing Apex Chengdu Sky Ville

Beijing Apex Chengdu Sky Ville Location Fangshan District, Beijing Location Jinjiang District, Chengdu Stake 50% Stake 50% Attributable GFA 94,000 sq m Attributable GFA 405,000 sq m Products Residential, villas, serviced apt, office, retail Products Residential, serviced apt, office, retail Date of first launch Apr 2014 Date of first launch Oct 2012 Current/expected ASP Residential – CNY17,000/ sq m Current/expected ASP Residential – CNY20,000/ sq m; LOFT – CNY17,000/ sq m

Source: Company, Daiwa Source: Company, Daiwa

30

KWG Property (1813 HK): 9 November 2015

Investment properties (Offices and shopping malls)

International Finance Place U Fun

International Finance Place U Fun Year opened 2007 Expected launch date 1Q15 Type Office Type Shopping mall Location Pearl River New Town, Guangzhou Location Xinjiangwan, Shanghai Stake 100% Stake 50% Other details Grade A office held for investment purposes Other details JV with Guangzhou R&F Above 95% occupancy rate in recent 3 years Residential portion (Amazaing Bay) launched in Mar 2012

Source: Company, Daiwa Source: Company, Daiwa

Tian Hui Plaza M. Cube

Tian Hui Plaza M. Cube Expected launch date 1Q16 Expected launch date 4Q16 Type Shopping mall Type Shopping mall Location Pearl River New Town, Guangzhou Location Chongwenmen, Beijing Stake 33.3% Stake 100% Other details JV with Guangzhou R&F and Sun Hung Kai Properties Other details First wholly owned mall Serviced apt launched in Nov 2011; Offices launched in Sep 2013 Boutique shopping mall with trendy brands and stylish F&B setting

Source: Company, Daiwa Source: Company, Daiwa

Shopping mall in Chengdu Shopping mall in Suzhou

Shopping mall at Chengdu Cosmos Shopping mall at Suzhou Apex Expected launch date 1H17 Expected launch date 2H17 Type Shopping mall Type Shopping mall Location Tianfu New Town, Chengdu Location Mudu Town, Suzhou Stake 100% Stake 90% Other details Upscale shopping mall next to the W Hotel Other details One-stop-shop large-scale family-friendly mall Residential portion (Chengdu Cosmos) launched in Dec 2013 Residential portion (Suzhou Apex) launched in 2010

Source: Company, Daiwa Source: Company, Daiwa

31

KWG Property (1813 HK): 9 November 2015

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Christie CHIEN (852) 2848 4482 [email protected] Kevin JIN (82) 2 787 9168 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan) Small/Mid Cap Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China) TAIWAN Jonas KAN (852) 2848 4439 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Head of Hong Kong and China Property Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Cynthia CHAN (852) 2773 8243 [email protected] (Regional) Property (China) Steven TSENG (886) 2 8758 6252 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (PC Hardware) Banking (Hong Kong/China); Broker (China); Insurance (China) Christine WANG (886) 2 8758 6249 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (Handsets and Components) Gaming and Leisure (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Dennis IP (852) 2848 4068 [email protected] Small/Mid Cap Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Kelvin LAU (852) 2848 4467 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] Capital Goods; Utilities

Transportation – Railway; Construction and Engineering (China) Jibo MA (852) 2848 4489 [email protected] SINGAPORE Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Custom Products Group Head of Singapore Research; Telecommunications (China/ASEAN/India) Thomas HO (852) 2773 8716 [email protected] Royston TAN (65) 6321 3086 [email protected] Custom Products Group Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Property and REITs Utilities and Energy Shane GOH (65) 64996546 [email protected]

Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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KWG Property (1813 HK): 9 November 2015

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KWG Property (1813 HK): 9 November 2015

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Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report.

There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

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Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 63.8% Hold** 22.2% Sell*** 14.0% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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